Tuesday, December 16, 2008

First Step: Triage

The solution to our present problems is triage: understand the context of the problems, prioritize what can be saved, live within our means and strip away all the perverse incentives, borrowing and financial legerdemain which currently dominate our economy, government and society.

Reader Jeff C. made an excellent suggestion: focus on solutions, not just the problems:

I really appreciate how you point out all of the problems with the current economic system and the possible future problems it has/will create. In addition, I think that most of your ideas are valid and very reasonable. However, I would respectfully request that you do more to be a solutions-based website.

If you have better ideas, now is the time to put them forward in a meaningful way. The collective "we" knows that things are dicey at best and horrifying at worst. Charts showing where you think we are going are instructive, but, they only solidify what is now blatantly obvious to all of us - we are in very dire times and they will get worse. You may have some type of insight this country (and this world, indirectly) is in need of. It is easy to point out the problems, it much harder to point out the real/right solutions."

Thank you, Jeff, for this important challenge. So here we go with the solutions which seem transparently obvious to me. But first, I have to provide the context for these conclusions.I should start by saying: the chances that any of these ideas will gain any traction whatsoever are essentially zero. The number of readers who will agree with all of these points is essentially zero because every one gores some sacred ideological cow: Libertarian, Progressive, Conservative, etc.

The fundamental idea I present here can be summarized thusly: we as a nation must live within our means, i.e. spend less than the actual surplus we create. Anything else is an illusory, temporary "fix" which simply forestalls the collapse of our debt-castle a few years.The second fundamental idea is this: strip away all the borrowing, financial legerdemain and perverse incentives which currently dominate our bloated, dysfunctional economy, government and society, and create positive incentives in their place.

This won't happen until we slam into the wall of insolvency, because very few will let go of their entitlements and political advantages. We will instead argue until we actually slam into the wall about "fairness" and "free markets" and bailouts, blah blah blah--all ideological "talking points" which have virtually nothing to do with the simple but horrendously difficult task of living within our means, restoring positive incentives and prioritizing what to do with our dwindling surplus of capital/labor.

The most important context is the one I described yesterday: the U.S. no longer creates enough surplus to fund its stupendous government expenditures and private consumption. To mask this reality, the nation collectively borrowed trillions of dollars in the past 8 years, at every level: government, private and corporate.

This orgy of debt is unsustainable, and has crippled the economy and thus our society.There is simply no getting around this. If the U.S. was so productive, then why did we have to borrow trillions to support the "American lifestyle" and Empire? If the economy had been truly productive, we would have been able to pay for everything with cash and spin off trillions in surplus.

The second context is: the incentives built into our economy and culture are self-destructive and dysfunctional. Why take responsibility for your own health and well-being when the government has promised to fix whatever's wrong with you? We want some miracle drug and we want the government (or somebody, we don't care who) to give it to us for free. It's our "right," it's what's "fair," etc.

If no one can be fired for incompetence, then guess what, incompetence flourishes.

Why create new energy sources or other real, productive wealth when it's so much easier to play around with "financial innovations" and rake off $600 million (the average "earnings" of the top hedge fund managers in the go-go years)? Why bother persuading voters when you can just hire an army of 41,000 lobbyists to sway the elected officials directly? Why not steal via white-collar crime when the pay-offs are huge and the chances of being caught and actually punished are so low?

The third context was also addressed yesterday: risk has not been eliminated, it's simply been cloaked by artifice, propaganda and borrowed money. The reason why many are drawn to Survivalist strategies is that they've grasped that the risks we have collectively dismissed as "in the past"--national fiscal insolvency, a near-worthless currency, widespread hunger, a breakdown of the medical system, etc. are either possible or increasingly likely.

In triage, we need to identify the highest systemic risks and then prioritize our national spending to lower those risks: of widespread crop failure/hunger, of disruptions in energy supplies, of fast-spreading diseases (either bioweapons or bird-flu type pandemics), etc. We need to realize that all the ideologically inspired shouting matches over gay marriage, abortion, CAFE standards, and all the rest of the propaganda-fed "news" and "debates" are essentially distractions.

When you're hungry and there's no gasoline and the lights are flickering--oops, another blackout--and you're family is sick with God knows what but they're not getting better, you won't give a dang about all the "issues" which we've been brainwashed into thinking are so important.

That such trivial "issues" are front and center reveals how we as a nation are living in a fantasy world in which risk has supposedly been banished. This fantasy has so distorted our view of reality that we've lost sight of the government's essential role: to preserve liberty and protect the citizenry against catastrophic risks: a nuclear exchange, a public health pandemic, mass hunger, a collapse of our currency, etc. Only a nation convinced of its invulnerability could be so deluded as to spend its waning days of wealth arguing about how the borrowed trillions should be divided, as if they were the spoils of conquest rather than the outright theft of our children's future.

The fourth context is demographic. Two workers cannot generate enough surplus to fund a third person's retirement for 30 years and hundreds of thousands of dollars on costly medical treatments. That is a demographic reality. Oh, and the two workers also have to create enough surplus to pay for the world's mightiest, costliest military and all the other costs of government beyond pensions and healthcare.

The fifth context is the cheap, plentiful energy source which has powered the Industrial Revolution --petroleum--is in decline. We have one generation to build new sources of equivalent kilocalories/kilowatts of energy, or there won't be enough oil left to do so. That's simply reality.

The sixth context is the unparalleled sophistication and reach of marketing and propaganda. The government has massaged data into Orwellian misrepresentations and then passed them off as "reality," and the Mainstream Media absorbs the manipulated data whole, feeding it to a mass audience as "fact." "Change" has been reduced to tweaking the various bailouts and stimulis packages (all paid for with borrowed money or money created out of thin air), all designed to keep the status-quo debt/deficit machine creaking along.

The Mainstream Media has followed Marx's prediction into monopoly concentration perfectly, with some six or so global corporations controlling much of the Western world's media: broadcast, radio, cable TV, publishing, print and web portals. Yes, the web is breaking down the monopoly, but let's not underestimate the incredible concentration of media ownership and control of what most Americans watch and read.

The seventh context is that in the financial realm, government's key responsibility-- law enforcement (i.e. regulation, investigation, oversight, etc.)--has been botched. This is so obvious it cannot even be challenged. The reasons are myriad, but the politically inconvenient truth is the "watchdog" agencies have all had their budgets cut and their roles eviscerated/proscribed/limited. Ask yourself, why? Then ask: cui bono? Who benefitted from the gutting of regulatory agencies?

The eighth context is that "capitalism" in the U.S. is itself largely a propaganda construct. The propaganda machine of "the free market" presents capitalism as a fairy-tale wonderland in which Madoff's $50 billion Ponzi scheme, Apple and the corner hardware store all operate in the same ideologically pure space.

This heavily hyped "model" masks the reality that the vast majority of the nation's productive wealth is held and controlled by a relative handful of citizens (and non-citizens). You can look through my archives for the statistics, but basically 2/3 of all productive assets and investment income are owned by 1% of the populace.

The End of the Washington Consensus:But the effect has been for the richest 1 per cent of the population to increase its share of interest extraction, dividends and capital gains from 37 per cent ten years ago to 57 per cent five years ago, and nearly 70 per cent today. Savings remain high, but only the wealthiest 10 per cent are saving – and this money is being lent out to the bottom 90 per cent, so no net saving is occurring."

This is a pretty good definition of "The Powers That Be" (TPTB). Who benefits from the status quo? Well, those benefitting most from the status quo. Capital can buy political policy to protect itself. Very simple.

Michael Hudson has drawn a key distinction between the classic "capitalism" of putting capital at risk in entrepreneural enterprises to create wealth and "rentier capitalism" which risks no capital, launches no new enterprises and which skims off rents (interest is the "rent" from capital) and non-productive gains from "financial innovations." It has more in common with feudalism than with capitalism.

That key distinction is precisely what the propaganda machine of TPTB strives to blur. Any attack on the rentier class is fended off with wrapped-in-Old-Glory appeals to the beauty and wonder and rightness of free market capitalism, as if Madoff and Steve Jobs are equivalent players. Protect one "capitalist," and you protect them all--even the ones who aren't truly capitalists.

OK, so there's the context. Now we make a key distinction between solutions: some are macro (national), some are micro (personal).

1. Dump the ideologies and ideological purity contests. Capitalism isn't some pure sweet academic model concocted in the Chicago School; it's messy, Darwinian, and always in play with political forces and human nature, i.e. greed, avarice, tribes, deception to protect advantages, etc. The same can be said of Socialism and Communism or religion-controlled systems. So #1, dump the ideologically pure models. All fail to capture what is essential in triage: what's practical and affordable.

2. Accept that we have two choices, and only two choices: muddle through/play with the edges of the situation, keep borrowing trillions/depreciating our currency, and face the eventual collapse of the entire system--i.e. systemic insolvency-- or perform triage: re-orient the system's incentives, lower what risks we can cheaply and effectively, and let go of what's hopelessly unsustainable/unaffordable.

As voters, we still control the political process and thus, indirectly, the spending of taxpayer's money and the regulations and laws of the land. If we passively do nothing, demand no change and re-elect the same old tired parrots of the Party Line ("borrow and spend, borrow and spend, brawk!") then those who benefit most from the status quo will buy as much political protection from the winds of change as they can.

3. Lose the entitlement attitude. Regardless of whether you love it or hate it, the Nanny State is unaffordable. Refugees from war-torn and poverty-stricken countries like Sudan, and in previous generations, Vietnam, come to the U.S. and forged a life of success based on opportunity, not entitlement.

All we are entitled to as American citizens is: life, liberty and the pursuit of happiness, freedom of speech and religion, the right to bear arms ("A well regulated militia being necessary to the security of a free State, the right of the People to keep and bear arms, shall not be infringed"), the rest of the rights provided by the Bill of Rights, a U.S. passport and as adults, a vote (unless we're convicted of a felony or don't bother registering to vote) and the right to own property. Everything else is not a right, it's a privilege or an entitlement.

Americans all too often have adopted an entitlement based worldview in which "somebody owes me something." Actually, they don't. The solution is "get real" and realize you won't be getting what is unaffordable and unsustainable, i.e. Medicare, Social Security or any other government-funded "guaranteed" pension or medical benefit as currently promised.

We all want it both ways. Guys want the "freedom" to ride motorcycles without helmets, but when they crash they expect to be taken to the emergency ward and have their cracked skulls patched up, on the taxpayer's dime. Time to grow up and accept we can't have it both ways.

4. The U.S. is essentially insolvent, so don't count on receiving the entitlements you've been promised. Interest on the national debt will soon exceed the Pentagon budget as interest rates rise, and that means staggering sums of our nation's wealth will be going to nothing but paying interest on past debt, never mind actually paying it down.

It's like a national credit card which keeps ballooning, until the "family budget" will be dominated by paying interest, squeezing out all other spending.

At some point, the U.S., states and local government will be forced to default on all their financial obligations such as interest on bonds, pensions, medical care, etc. This will happen in one of two ways: either insolvency will be announced, i.e. we can no longer pay our obligations, or the dollar will be devalued to 10 cents (or less), thus reducing everyone's Social Security pension of $1,000 down to $100 (or less). Magically, all debt and interest due gets cut by 90%, too.

Since the populace prefers artifice to reality, then this 90+% reduction in purchasing power will most likely come via dollar devaluation than outright bankruptcy--though I wouldn't count out the possibility that a future sacrifical president would fall on his/her sword and announce the bankruptcy of the U.S.A.

Either way, plan now for the elimination or reduction in all entitlements. The macro way to stave off total collapse for awhile would be to means-test all entitlements; if someone's making $3,000/month or more in other pensions, then their Social Security would be reduced to near-zero.Is that fair? Well, we don't have enoughmoney to be fair. So maybe we should return to the original idea which was to lower the risk of retirees being subjected to absolute poverty.

Medicare will implode even sooner than Social Security, so the triage will have to be even more brutal. Care paid for by the government/taxpayers will have to be rationed, and it boils down to choosing the rationale behind the rationing. One way is to do it by age; beyond X age, taxpayers will provide only pain management. Beyond age X, we're on our own so we better start saving or buying our own insurance coverage.

Remember the context here: the actual surplus we have available to spend on medical care is shrinking. There is no more "free money" so we have to make do with what we have. Should the 40-year olds get replacement hips before the retirees, since they're still working and have kids to support? That seems fair to me. If there's any money left over, then we hold a lottery to divvy up what's left in the pot.

That's not anyone's ideal solution but again, the alternative is the collapse of the entire system: insolvency, in which the government can no longer sell off worthless debt to raise worthless dollars to pay real bills.

5. Take responsibility for your own healthcare. Medicare is toast, on its way to oblivion or lotteries or restrictions which limit care to Third-World standards (i.e. what you get now if you don't work for the government or have gold-plated coverage or sky-high private insurance.)Actually, Second-World care in Thailand, India, China etc. is as good or better as care in the U.S. and it's much, much cheaper. If you absolutely need surgery, start researching hospitals in Mexico, China, India, Singapore and Thailand.

The most important step in taking responsibility for your own health is to completely ditch the standard American diet of junk food, prepared food and high-salt, high-fat, high-sugar "food." I have a fast-food burger maybe once or twice year; I really don't miss it because my slogan is: "You don't miss what you no longer want."

I want health, not sickness, so there is no packaged food, white bread, etc. in our home and I don't miss what I no longer want. Our diet is Asian/mediterranean/ common-sensial: meat and fish in small portions, lots of fruit, vegetables, beans, lentils, etc. Nothing new or fancy here, just what we all know makes up a healthy diet.

Many readers of this blog eat "home cooked" meals only, and as another slogan of mine has it: forget the "revolution" of barricading the streets: "A healthy homecooked family meal and a home garden are revolutionary acts."

Take the power away from a failed and unsustainable "sick-care" based not on prevention but on exploiting your chronic diseases for profit by changing your diet and exercise habits. Remember: You don't miss what you no longer want. If you change the goal from sickness and ill-health (i.e. what you get with the standard American diet) to health then you no longer even want or miss the garbage passed off as "food" in America.

Exercise. Even if you are disabled, do whatever you can within your limitations. Exercise is even more important than diet--it is the one true "health miracle". An active life is what we're selected for, just as we are selected for an omnivorous diet of many food sources, mostly raw or slightly cooked, and heavy on seeds (nuts), fruits, edible plants (vegetables) and occasional meat/fish.

You don't need to go to the gym; any 6 ft. by 6 ft. space is a gym. Learn yoga, dancercise, marital arts, etc., ride a bike in seasonable weather, walk a couple miles a day, dig up a garden with a pickaxe and shovel-- there are many ways to stay active and therefore fit.

Nobody is going to save you from your bad habits; every other belief is illusion. If you need an operation, then you better start saving now and planning your flight to India. Dental care is available across the border in Mexico for very reasonable fees, as correspondent Jim Twamley has described in depth on his blog RV Now.

6. Learn to hedge. As I have repeatedly decribed here (often calling upon Harun I. for commentary), there is no "magic bullet" in retaining or building your wealth in the coming decades; you will need to be flexible and seek opportunities to hedge against rising costs or a depreciating dollar as they arise. "Buy and hold" won't work; even when buying gold and silver, there are better times to buy than others. Those who bought gold at $800/ounce in 1980 have lost staggering sums in the ensuing 28 years; adjusted for inflation, gold will have to exceed $3,000 before they "break even."

Rice and wheat are cheap again? Stock up on them as a hedge against higher prices in the future. gasoline is cheap again? Buy a gasoline futures hedge to lock in low prices. Or maybe buy oil/gas ETFs or stocks, which will likely offset your rising fuel costs by appreciating.

Concerned the dollar may well depreciate? then buy some physical gold, or via BullionVault where your gold will be stored in Europe if you reckon the U.S. government might confiscate privately held gold as it did in 1934.

7. Learn a side-skill/business which either creates surplus food or energy or tradable goods. Grow some food, however small in quantity, if you can; it's not just saving money, it's about appreciating where real food comes from and what it tastes like. Learn to cook real food.

8. Build networks based on reciprocity, generosity and mutual aid. Since our government cannot provide all that's been promised (based on a much higer worker-to-retiree ratio), then we have to build alternative support networks of the traditional types: family ties, church, neighborhood, craft guilds, etc.

10. Understand that our economy and government will have to be re-ordered so that the incentives are positive rather than perverse. Someone's sacred benefits/advantages will be eliminated at every turn. If we don't insist on wiping the political slate clean occasionally, then the usual perverse incentives will return as capital buys protection via policy and regulation--cloaked, as always, as "benefitting the little people" or "national security" or what have you.

If we slam hard enough into the wall, then the resulting triage might offer some wonderful opportunities. For instance, the 100,000-page tax codes could be tossed out and a 5-page FAIR (consumption-based) tax system put in place.

If I had to summarize the solutions, I would say this: the promises our governments (Federal, state and local) have made are unsustainable and unaffordable because our economy cannot generate the real surpluses needed to fund the promises made, given the demographic and financial realities.

There are no fiscal solutions except to live within our means. Borrowing money or creating it out of thin air merely papers over this reality, and these tricks will inevitably lead to the collapse of the entire debt-castle.

We like the concept of personal responsibility more than we like the reality. The solution is to take full responsibility for one's own health and retirement (or old age might be more accurate). That requires saving capital (surplus) and actively conserving it/growing it, reducing debt by whatever means are necessary/practical, and conserving/nurturing one's health.

Triage requires prioritizing, and I myself would focus on conserving/protecting/ nurturing three essential treasures: our liberties as granted by The Bill of Rights, our health and our networks of mutual support: family, friends, neighbors and colleagues.

Politically, I would focus on three core concepts: strengthening the government's essential responsibility: law enforcement, oversight, enforcement of regulations, etc. especially of those with the capital to buy political protection; re-orienting our economy, government and society to positive incentives via the elimination/restriction of perverse incentives and borrowing/debt, and making the sacrifices necessary to build a new energy complex capable of generating the energy content of 15 million barrels of oil a day--a complex, inherently risky multi-trillion dollar enterprise.

Food is wealth, health is wealth, energy is wealth; all else is illusion.

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